I had an enjoyable conversation with John Ray, host of Nashville Business Radio. We chatted about a variety of topics, including the future of entrepreneurship post-pandemic and the future of entrepreneurship education. You can listen in here.
I had an enjoyable conversation with John Ray, host of Nashville Business Radio. We chatted about a variety of topics, including the future of entrepreneurship post-pandemic and the future of entrepreneurship education. You can listen in here.
When entrepreneurs start their first business, not only is it their first time as a business owner, but also their first time as a CEO.
Being the “CEO” means very little in the early days, but as the company grows, the title of CEO takes on more meaning. Defining your role and your style as the CEO of your company takes planning and specific effort on your part. It may even feel a bit awkward at times, but you have to establish what your role will be as the CEO.
Many entrepreneurs start their businesses because they like the hands-on part of their business. Engineers like to engineer. Furniture makers like to build stuff. At some point in the growth of the business, the entrepreneur begins to move away from the hands-on part of what their company does. This can be a painful and frustrating period.
As they move away from the hands-on, entrepreneurs must learn the other strengths and weaknesses they bring to the business.
If you have a knack for numbers, keep the financial management of the business part of your core responsibilities. If you are good with customers, don’t be in a hurry to give up selling and customer relations.
Your “job description” as CEO should be a reflection of your skills, abilities, and knowledge. However, no matter what your specific role as the CEO is in your business, growth demands you start to build your team.
There are three common mistakes that entrepreneurs make when delegating.
The first mistake is being hesitant to delegate.
When first beginning to delegate to employees, some entrepreneurs might feel that no one can do what they do as well as they can do it. Employees might not care quite as much as the entrepreneur does. After all, this is your business, and your reputation is tied to its success. To employees it is simply a job.
To overcome this hesitancy to delegate, entrepreneurs should remind themselves that sometimes “good enough is good enough.” While employees may not carry out the tasks delegated to the level of perfection you would, they can learn to perform these tasks well enough for the business to run smoothly and for customers to stay satisfied.
The second mistake entrepreneurs make is rushed delegation.
Rather than being hesitant to delegate, entrepreneurs who make this mistake seem as if they can’t wait to get tasks off their plates. We see this quite often with serial entrepreneurs who are so eager to get to their next new business idea that they don’t take the time to get their current one running properly before moving on.
These entrepreneurs delegate without providing proper training and without giving clear expectations for performance.
In the rush to delegate, tasks and responsibilities can also end up being assigned to the wrong person or mistakenly to multiple people simultaneously. This can lead to chaos and frustration.
To overcome rushed delegation, develop a clear and detailed plan that includes what needs to be delegated, who should be assigned the task and what needs to be done to prepare employees for their new responsibilities.
The third mistake is undermining the delegation process.
Even after the delegation of tasks and responsibilities, employees will still tend to want to go directly to the entrepreneur to get an answer to a question or to make a decision, instead of going to the person now assigned to that area. If the entrepreneur answers that question or makes that decision, it will completely undermine the authority of the person it has been delegated to.
I developed a “seven-second delay” to avoid this mistake. When I was asked for an answer or a decision I would always pause for a few moments to ask myself, “Is this still my responsibility or have I delegated this to someone else.”
If I had delegated it, I’d answer by sending them to the employee to whom I had given that responsibility.
Delegation is a lot like raising teenagers. At some point you have to begin to let go so they can learn — and grow up. With your business, if you don’t learn to let go and delegate, your business will never successfully “grow up” to the next stage of development.
As founders build their team and delegate responsibilities to their leadership group, they must pay attention to seven elements that are part of every entrepreneur’s job description as CEO:
By integrating these elements into your job description, you will be on the path to becoming a more effective CEO of the business you founded.
“The biggest cause of failure in business is success.”
(A favorite saying of my late father, RM Cornwall)
“Every time the business owned by an entrepreneur who banks with us starts to grow, I get nervous. And if it grows quickly, I go on high alert!”
(A banker who wishes to remain anonymous)
When I look back at a failed entrepreneurial venture, its demise can most often be traced to one of two causes. Either their business model was flawed from the start or they were not prepared for their business model to succeed and had trouble handling the growth that followed.
During growth, entrepreneurs must lead their businesses through various stages of development. One of the best models to help entrepreneurs understand these changes was developed by Eric Flamholtz. In their book (now in its 5th edition) Growing Pains, Flamholtz and Randle present a practical model that helps entrepreneurs understand the stages of business growth. A fellow entrepreneur gave me a copy of this book in its first edition while we were managing the rapid growth of our healthcare business back in the 1990s. I have been recommending it ever since, and have had the authors as our guest speakers at Belmont several times over the years.
In the early stages of growth, the entrepreneur engages in what Steve Blank refers to as the Search Process for the basic business model. The entrepreneur is finding a gap in the market, and developing a product or service to address that market need. This is where the testing and pivoting of the business model occurs.
Once the business model begins to show signs of market traction, the next stage is to secure the resources the business needs to grow. The entrepreneur must secure the cash, talent, materials, facilities, and so forth needed by the business to support its growth. If the entrepreneur fails to secure necessary resources, even the most promising business model can fail.
In the ensuing stages, Flamholtz and Randle chart the path to successfully navigate growth. First comes the development of critical operating systems, including financial systems, marketing systems, production systems, and human resource systems. Next comes the development of key management systems, including planning, organizing, leadership development, and performance development. Finally, the entrepreneur must build an intentional culture to ensure the sustainability of the values and beliefs the founders brought to their business at its inception.
Each stage in the development of the business leads to specific new challenges in the next stage of growth.
The entrepreneur must watch for a wide array of critical symptoms that warn of impending crises involving customers, employees, and the organization itself. If these symptoms are detected early enough, the entrepreneur can act to prevent significant challenges or even the possibility of business failure that can come from poorly managed growth.
Symptoms of Customer Challenges
Customers are the proverbial “canary in the coal mine” during growth. Customers provide the earliest warning signs that growth is not being managed properly.
A fundamental growth challenge for early stage business is selling more than the company can possibly deliver. In their zest to build a successful business, many entrepreneurs get out ahead of their capacity to produce their product or provide effective service. When this happens, the company’s reputation in the market suffers.
Another symptom that a company is having challenges is when it starts to lose good customers. This may be the result of poor quality, poor customer service, or both. Customer retention should be a key ratio for every entrepreneur to watch on their dashboard. When customer turnover reads exceed expectations, an entrepreneur should quickly diagnose the problem and take appropriate actions. Customers have little patience with a business that no longer delivers its promised value proposition.
Symptoms of Employee Challenges
Employees are also an important early warning system for growth problems.
Certainly, the entrepreneur should pay careful attention to staff turnover and employee morale during growth. It can be hard enough to recruit enough new employees to support growth. Needing to also recruit employees to replace disgruntled workers can make it an almost impossible task to keep up with the company’s hiring needs.
Rapid growth often negatively impacts employee efficiency and productivity in their jobs. Employees never seeming to have enough time to get their basic work done or spending most of their time putting out fires may be sure signs that the entrepreneur should slow down growth and take corrective actions.
Other employee related symptoms of growing pains includes poor communication, a lack of understanding of the vision, and a general insecurity among workers.
Symptoms of Organizational Challenges
Finally, there are symptoms at the organizational level that also need to be monitored.
A constant shortage of critical resources, overwhelmed operating systems, and ineffective planning can all be signs that an entrepreneur is not prepared for the growth of the business. I will address all of these more in future posts.
The most disconcerting symptom is when sales are growing, but profits are plateauing or even declining.
Overcoming the causes of these and other symptoms is no easy task. There is not one magical thing an entrepreneur can do to achieve pain free growth. Over the coming weeks I will be looking in depth at what entrepreneurs can do to help ensure successful growth in their business ventures.
Life in the classroom is different than it was just a few years ago. Students have had it drilled into them that during class discussions, above all else, they must not offend. A study by the Knight Foundation (conducted in 2019) found that 68% of college students say that “the campus climate prevents them from expressing their true opinions for fear of offending their classmates.”
This new ethic makes open and honest conversations in my classes about business ideas and broader discussions about business related issues difficult to foster.
The trend of trying “not to offend” has made preparing young entrepreneurs for the world of (dare I say it) free enterprise problematic.
Markets have no feelings. Customers don’t worry about trying to “not offend” a business when choosing not to do business with it. If a competitor does a better job of meeting the needs of the consumer, that is where consumers will spend their money. Period.
My job has always been to prepare entrepreneurs for this brutal world. I do this by challenging them to get honest feedback from the market about their idea by teaching them the tools they need to get information (good and bad) to use to improve their business models. My job then becomes reinforcing the message the market is giving them as I coach and mentor them.
I described my role in a blog post that I wrote a dozen years ago:
Entrepreneurs seem to always have plenty of cheerleaders. Family and friends are there for encouragement and lifting your spirits. A good mentor is someone who will tell you the truth — even if it hurts. My students and alumni will sometimes refer to being “Cornwalled”. When they bring their ideas or fledgling businesses to me for advice, my job is to try to find every weak spot, every possible flaw, every vulnerability they face in the competitive market. One student once said to me, “Dr. Cornwall, you are such a Dreamkiller.” As much as I would love to join the ranks of cheerleaders, I know that my role has to be to help ensure they get their business right and find their way to be able to thrive in the market.
A common reaction I see from many young entrepreneurs when they are given constructive criticism of their ideas is that they either ignore the information or they give up on their idea.
Last semester I used our family business in an introductory class as an example of the process entrepreneurs go through when pivoting their business models. When we launched our business, the market challenged our assumptions on multiple occasions. Each time, we used the information to pivot our business model to help our business thrive.
My intent with this example was to offer a concrete example of the reality of the entrepreneurial journey. Entrepreneurship requires open-mindedness, determination, and persistence. My goal was to encourage and inspire them. For many in that classroom, it had the opposite effect — it discouraged and even demoralized many of them.
The message we need to offer to this generation is that criticism is not failure. And in many cases, criticism is a critical ingredient for eventual success.
What is encouraging to me is that not all of my students are unwilling to hear honest feedback about their ideas. In fact, if approached the right way, many are actually quite receptive.
However, I have had to make significant adjustments in my approach to teaching young, aspiring entrepreneurs. I have learned to be a bit more measured in how I coach them. Rather than starting with a blast of honesty, I slowly build to a crescendo of constructive feedback. I have learned to be more patient. I have learned the power of being kind, compassionate, empathetic….and honest.
I continue to be very proud of the number of students who are becoming successful entrepreneurs. They understand the importance of listening to the market and seeking constructive feedback from mentors. Most importantly, they are learning to not be offended by honesty.
Pitching to investors has always been like playing whack-a-mole. Connecting with the right investor at the right time can be quite tricky.
Now add all the impacts from COVID-19. Angel investors all but disappeared in the second quarter amid he pandemic chaos. Venture capital firms became much more cautious and conservative in their funding, trying to mitigate their risk amid almost infinite uncertainty. More than we have seen in many years, traditional savings skyrocketed as both people and companies fled to cash for financial security.
Many angels who were still investing focused on shoring up companies already in their portfolios with additional capital.
Toward the latter half of 2020 and moving into 2021, certain segments emerged as investor favorites. HealthTech, FinTech, CleanTech, EdTech, and eCommerce are seeing a continued increase in deal flow. The success of Zoom is making deals that offer better efficiency in business-to-business transactions a new focus of investors, as well. Deals with strong elements of “sustainability” in the business model are seeing increased attention.
However, overall it seems that investors are moving from hot industries and industry sectors, to a much more targeted form of investing. As the world is disrupted from COVID and the economic crisis, investors are now focusing on a broader range of deals that focus on specific problems arising from the sudden changes in our world. Investors are seeking opportunities that fit what they see as the “new normal.”
Even if it takes a bit of pitching gymnastics, try to highlight any COVID overlay in your business.
And then there is Zoom….
The events of 2020 brought an abrupt end to localized start-up pitch events. Gone are the days of live Demo Days. The ritual of making the rounds from VC board room to VC board room to VC board room are no longer happening. Gone are the massive investment conferences. Everything is now on Zoom.
The entrepreneurship world quickly adapted to the new normal of raising funding. It had to happen, even with COVID, as entrepreneurs still need funding and angels are still looking for fund deals.
Inboxes now fill up with Eventbrite invitations to Zoom pitch events. Meetup groups now facilitate bringing together investors and entrepreneurs via Zoom. No more standing in front of a room full of investors and entrepreneurs. Now entrepreneurs pitch into the little green dot on their computer.
Just as there was an unwritten set of rules, expectations, and norms for live pitching, we now are seeing a consensus on Zoom pitching protocol take form.
Some things about pitching have not changed. You need to be compelling and concise, as you only have the first few minutes to connect on a pitch. You need to look and act the part. Dress well; business casual is generally the norm. Since you no longer have body language to communicate your confidence and enthusiasm, you need to show this through your voice.
Here are a few tips specific to Zoom pitches I have been hearing from both experienced entrepreneurs and angel investors:
Even the pitch deck has evolved post COVID. You should have two versions of the same pitch deck prepared.
First, entrepreneurs still need to prepare a traditional pitch deck for live pitches on Zoom.
The second is what is being called an investor pitch deck, an annotated pitch deck, or a stand-alone pitch deck (there is still no consensus on the preferred term). It should be organized exactly like the deck used for your live pitches, except that most of the slides will be split in two. The one side includes the same graphics used in the oral pitch. The other side includes a short narrative including what you would be saying about that slide during a live pitch.
Use the widescreen format for your deck to make plenty of room for the two sides. There should be no more than 150 words per narrative section on each slide on the narrative side, with the ideal word count being about 50-100 words. There is no need to include the narrative side text on slides which are self-explanatory, such as financial summaries, timelines, and so forth. The split between the two sides should be about 40% for narrative, and 60% for the graphic side.
This is the version of the deck you want to send out to investors who want to preview your deal before meeting with you over Zoom. Think of it as an executive summary of your business plan with pictures.
Deal flow is increasing as we enter into 2021. The strong market on Wall Street and cheap capital has buoyed investor confidence and their portfolios. We are seeing more angels get back into seed investing, which is outstanding news for startups!
Unless COVID takes a nasty turn for the worse (what John Mauldin calls the “gripping hand” of the economy), things are looking up for a better year for startup entrepreneurs.
“Maybe it’s time for you to get a Controller.”
I have said that to entrepreneurs more than once over the past few months. In every case, all of these companies had already brought in a person designated as CFO (Chief Financial Officer) to lead the financial aspects of their company. And in every case, that was the wrong type of person to hire for the specific needs of these companies.
Entrepreneurs who experience significant growth in their business may eventually hear this advice, be it from their CPA, their banker, or other entrepreneurs. Financial management in a growing business can become strained. Eventually, the time will come when the entrepreneur needs to upgradecertain members of the team.
The first instinct of most entrepreneurs seems to be to hire a CFO. In some cases this may be the right choice, but in many situations a controller or even a senior level bookkeeper might be what is really needed.
Let’s assume what you need to get done is the following:
– Keeps accurate records of financial transactions and also creates basic financial statements (Income Statement and Balance Sheet) using accounting software.
– Performs basic accounts payable management — makes sure bills get paid and records these entries into the accounting system.
– Performs basic accounts receivable management — if the business has to send invoices to customers to receive payment, sends out invoices monthly.
If this is the list of functions that need to be taken care of, you really need a senior level bookkeeper. These are the functions that would be in the job description of an experienced bookkeeper.
As a company grows and becomes more financially complicated, a controller adds more horsepower to the financial management team. Depending on the nature of the company, this often happens when the business grows to about $1 million to $3 million in revenues. (Although, I have seen companies much larger than that get by with a solid bookkeeper and a hands-on outside CPA).
A controller does the following tasks:
– Performs all of the functions of a bookkeeper or supervises the staff that does.
– Creates customized daily, weekly and monthly financial reports to meet the specific needs of a specific business.
– Chooses and maintains financial software.
– Provides basic cash flow management of the business. Major cash flow decisions should still be made by the entrepreneur, however.
Good controllers can pay for their salaries in a growing company. They do this by helping to create needed financial systems, by keeping costs under control, and by helping to manage cash flow more effectively.
One situation that may require a CFO is if a business must raise a significant amount of outside funding to get off the ground. This is particularly true if the CEO/founder does not have a strong financial background.
Some businesses may grow to the point that they need a CFO, but this is not true for every business. Many very large organizations don’t have CFOs. If the capital needed for growth must come from complex debt instruments, private equity, or venture capital, a CFO is likely to be an important addition to the leadership team.
A CFO does the following tasks:
– Performs all functions of a Controller or supervises a staff that does these tasks.
– Structures and negotiates complex financing — including both debt and equity.
– Creates complex financial projections to aid in strategic decision making and is an active player in the strategic management of the business.
– Manages banker and other financial relationships for the business.
One risk of hiring the wrong person is that you end up overpaying for what you really need done. The typical salary of a controller can often be at least twice as much as the salary of a senior bookkeeper and an experienced CFO earns easily twice as much as a controller.
If a CFO does not have enough work to do in the financial management of the firm, idle hands can become the devil’s workshop. I have seen CFOs who become overly involved in the strategic decision making that should be the domain of the founders, sometimes creating unnecessary descent and conflict.
The titles “bookkeeper”, “controller” and “CFO” often get tossed around rather loosely. Many entrepreneurs give the title of CFO to people who are not qualified to be one. They may do this to help bolster the external perception of the company, or simply to offer a nominal reward to someone in place of higher salary. However, to bankers and investors, titles within the financial management of a business have specific meaning. If you give the title of CFO to someone with the knowledge and qualifications to be a senior bookkeeper, you may destroy the credibility of your business with bankers and investors.
Use your advisors, CPA firm, your banker, and your network of experienced entrepreneurs to determine what type of financial professional your business actually needs. Once your needs are clearly established, these same people can also help you find a pool of candidates to interview.
Young entrepreneurs generally seem to be reluctant to consider using debt to help finance their businesses.
The reasons they cite are many. Often, they are concerned that they already have a heavy debt burden due to student loans from college. Others tell me they watched their parents get deep into debt and don’t want to do the same. The requirement to sign personal guarantees for business debt terrifies many young entrepreneurs. More than a few tell me that Dave Ramsey’s anti-debt message shaped their negative perceptions about debt.
When I tell my students that, generally, I prefer debt over equity financing, I see shock on many of their faces.
There are certainly many instances when taking on debt financing for a business is not a prudent decision.
When I hear of entrepreneurs maxing out credit cards to finance a startup, it sends shivers down my spine. I know that there are countless stories in entrepreneurship magazines about “heroic” entrepreneurs who went tens of thousands of dollars in debt with credit cards to create incredibly successful businesses. But for every successful use of credit cards to launch a business, I have seen dozens who end up with failed businesses and mountains of credit card bills that haunt them for years.
Bankers can tell countless stories of business owners with business models that are no longer competitive seeking loans to keep their failing businesses afloat. Rather than keeping these businesses on life support by continuously pouring money into them, these entrepreneurs need to come to the hard realization that they have come to, what I call, an “Old Yeller” moment. Sad, but true.
Some debt funds short-term needs for cash, while others fund longer term investments in your business. However, sometimes we use debt for the wrong purpose. For example, when I was a young entrepreneur, I used a line of credit to invest in things that were actually tied to growth capital. A line of credit is meant to fund short-term timing issues with cash flow, such as funding inventory purchases or paying for payroll on a project that will be billed upon completion. I used it for hiring staff and adding new space that would take much longer to generate cash flow.
Fortunately, I had a good banker who helped coach me on the proper uses of lines of credit. He also provided us with a long-term term loan to use to fund the investments we needed to make in staff and space to grow our company. I never made that mistake again!
Good debt begins with debt that your business and you can support. This is how bankers make decisions on making loans.
Bankers always look to multiple means of repayment when making business loans. The first source of repaying is a healthy business with more than enough cash flow to fund the debt. The second line of defense to ensure loan repayment is the personal guarantees of business loans by the business owners. If your financial house is not in order, your chances of getting a loan for your business are diminished. Finally, bankers will use assets pledged as collateral to pay off business loans, but only as a last resort.
“Bankers only give loans to people who don’t need it,” is a common refrain I hear from small business owners. The reality is, bankers only give loans to people who they are highly confident can repay those loans. After all, it is our deposits in the bank that they are using to fund loans.
Bankers understand what makes good debt, and you should understand and follow their criteria for using debt.
The requirement of personal guarantees are a sobering aspect of taking on a loan for your business. Keep in mind, personal guarantees are not only a financial tool used by banks. It is also a psychological tool. If you are not confident enough in your business to personally back the loan, then why should the bank?
Another risk with taking business loans is that although your business might be solidly bankable when a loan is made, times can change. We need to look no further than the thousands of loans that went from safe and solid earlier this year, to being rated as highly at risk for default after pandemic took hold.
When you need to use debt, make it a priority to pay down your business loans as quickly as possibly. Certainly, don’t pay off your loans so aggressively that it hurts your cash flow. However, once you have a good cash position, the next most important goal is to pay off your loans.
The reason I prefer debt to equity is that debt is like a house guest. When you pay it off, it goes away. Equity is like adding a new member to your family. Once you take their money, they are there to stay!
Once revenues start rolling in, entrepreneurs have nothing to worry about. Right? After all, the market has verified that their business model is sound. What could possibly go wrong?
Well, actually, many things can go wrong. One of my late father’s favorite sayings was, “The single biggest cause of business failure is success.”
Entrepreneurs who are unprepared for the challenges of growing a business can often derail even the most promising business model.
So how should you plan for growth?
The first step is to make sure how big you really want and need your business to become.
The best tool I have found to engage in smart planning for growth is to use what I call a bottom-up income statement. Rita McGrath and Ian McMillan called the process Discovery-Driven Planning in their classic article about this technique first published in HBR in 1995. (Here is a more recent summary of this class article). I learned it from my late father back in the 1970s.
The basic logic is this: start with how much you want to make when planning for the growth of your business.
Let me offer an example based on using this tool to help my daughter Maggie and son-in-law Matt when trying to figure out how big to grow their commercial painting business, Harpeth Painting.
Matt had bootstrapped Harpeth Painting. Initially, Matt kept his day job with a commercial construction company to support their family. He worked on the new business mornings, lunch hours, nights, and weekends. Having identified a niche in the market and executing the startup well, the business grew steadily during its first year.
Right around the first anniversary of the launch of Harpeth Painting, our daughter gave birth to their third child. Harpeth Painting was doing well. Its cash flow could make up for the salary he had been earning, and they had accumulated a good cash balance in the new company.
Maggie said, “We now have three kids, including a new baby. It is time for you to work only one job!”
So Matt took the leap of faith and quit his “day job.”
Three years into the growth of the company, Maggie came to me wanting help to determine how big they needed to grow the business. It was doing well, but they just weren’t sure how far to take its growth. They had no real aspirations to build an empire or even a big company. They just wanted to earn a financially stable living from it. The business had grown to about 25 painters. Any bigger would require that they start to invest in some administrative positions to help them out.
Maggie and I met in my office and began to whiteboard a financial model for their business.
I asked Maggie how much they needed to take home each month to live comfortably. The business was already generating enough income so that number was their current personal budget. We only added a bit to this number for cushion.
Next we added income tax to that number, as their company is an LLC. We put a little extra in this estimate, as well.
Finally, I asked what they intended to save each month. Their business is one that will not have much if any value when they are ready to retire. If they have equipment, or even a building of their own some day, this will have value. But Matt is the business. All of the work they get is built off of his relationships. So that means that any savings for retirement, college, etc., etc., has to come from the cash flow of the business over time. Maggie gave me their target savings, which was a reasonable amount. I doubled it!
We now had the foundation of the financial plan to guide the growth of their company.
Their business has a fairly simple overhead structure. Matt and Maggie both draw a paycheck. The company rents space for trucks, equipment, inventory, and an office for Matt. They have a couple of people on salary. We also added in marketing, insurance, and so forth. They are both dedicated bootstrappers (the apple doesn’t fall far from the tree for either of them), so their overhead was all quite reasonable.
Sometimes when I do this technique, I find lots of bloated expenses in a business. Not this time!
With overhead and what they need to make from the business, we now know how much gross profit (sales minus variable expenses/COGS) the company needs to earn. Add everything up we have so far, and we have that target for required gross margin.
To determine sales required to reach the financial aspirations of the owners, we use this formula:
Required sales = Required Gross Margin/Gross Profit Margin
Let’s look at this with completely hypothetical numbers.
Required Gross Margin = overhead+earnings goal+pass through taxes+ savings goal
=20,000 + 10,000 + 5000 + 5000
Gross Profit Margin = 20%
Required Sales = 39,000 / .20
= $200,000 a month in revenues
So for this hypothetical example, the company would need to maintain annual revenues of about $2,400,000 to reach all of the owner’s personal goals from the business.
When I did this with Harpeth Painting’s actual numbers, Maggie was delighted. As it turns out, the current size of the business is at 50% more than they need to hit their targets.
That was great news, as they had just met with their two supervisors, and all of them agreed they loved the current size of the company.
Maggie’s next thought was that she was not sure they wanted to take out enough cash to meet their savings goal quite yet. Their business model required putting out cash up front for jobs, and they would rather not do this with their line of credit unless absolutely necessary.
So the last step was to determine how much cash they needed to have as an average balance to meet the working capital needs of the company.
My rule of thumb is that every business needs to have a goal of at least 30 days operating cash on hand. That means that if no cash comes in for 30 days there is enough cash in the bank to cover that period of time.
Given the cash flow challenges of a commercial painting company, I recommended at least 60 days cash on hand and 90 would not hurt. I believe personally that six months would not be an excessive amount.
Some argue that this is poor asset management, as cash really earns nothing. For me, having cash in the bank helps me sleep well at night. That is a value much higher than any interest I might be able to earn.
Rather than growing the business simply because you can, know how big you need it to be to meet your short and long-term needs. Life is short. There is more to life than running a business. Don’t get me wrong. I love being an entrepreneur. However, I also love being a husband, a father, and a grandfather. We love to travel (hopefully someday soon), I love to golf, and I love to spend time with Ann. All of that takes planning when you’re an entrepreneur, and the bottom up income statement can help!!
The coronavirus and economic crisis have certainly challenged many entrepreneurs to do some serious re-evaluation of their business models. One of my friends compares it to being a toddler playing at the beach, getting knocked down by wave after wave after wave. More often than not, this has resulted in more hopscotching than simple pivoting when it comes to business models. Rather than incremental changes, known as pivots, entrepreneurs are being forced to reinvent their businesses on the fly as the pandemic creates seismic disruptions in society and in the economy.
Significant pivots in business models are common during the early days of a new venture. We pivoted the business model of every startup I have ever launched once we opened for business and received feedback from the market. In the days when we relied on formal business plans to guide our startups, some of these pivots could be rather jolting. Today’s business modeling tools facilitate a more incremental process of pivoting during early days of a new business. Steven Blank refers to this as the searching stage of customer development.
Once the searching stage leads to a clearer picture of what the market truly needs our business model to be, the execution stage begins. This is where the focus shift from customer discovery and pivoting, to scaling and building business infrastructure.
The disruptions being caused by the coronavirus and the governmental policies that are following the outbreak, force established businesses to jump, or hopscotch, to a new version of their business model or even a new business model entirely.
Some of these are more survival strategies. For example, distilleries across the country have shifted some or even all of their production capacity to making hand sanitizer. Such efforts have helped ease the temporary strain on the supply chain for hand sanitizer until the market can stabilize. Restaurants, with their dining rooms temporarily closed, are turning to curbside service, grocery sales, home delivery, family take-out meals, and so forth to bridge the gap until they can return to business as usual. Boutiques have found that people are buying fewer new outfits, as we are mostly working from home. So many have decided to make face masks a fashion accessory.
Some changes in business models look to be more permanent. I have already highlighted changes in travel and music that are likely to be more permanent post coronavirus. I plan to look at other industries over the coming weeks.
So what is an entrepreneur to do during such a crazy time?
Steve Blank suggests using a tool called the Market Opportunity Navigator to help uncover new opportunities for a business to pursue amid the coronavirus. In his blog post, Blank offers a great case study to illustrate how a healthcare company discovered how to hopscotch its business model.
Ted Ladd offers a process in a column at Forbes that is helpful.
The first step is to deconstruct your business model to its core parts using the Business Model Canvas. As I tell my students, the business modeling tools we have at our disposal today are not just to help you launch your business. They are powerful tools to help you navigate your business through the many changes that are likely to come in the future, even in “normal” times. This article in the Cape Cod Times offers some specific things to consider when deconstructing and re-evaluating your business model.
Next, Ladd suggests that entrepreneurs reimagine each part of the business model, using creative thinking processes, to reinvent each part of the model in the new world created by the pandemic.
Finally, Ladd suggests that, just like you did at the startup stage, you need to work with your customers (which may be entirely new customers) to test and refine the new elements of your business model.
One of the first blog posts I made as the coronavirus crisis began to unfold was about resolve. As I stated at the end of this post:
The resolve we are seeing among entrepreneurs will pay off for our economic future. It will take time and hard work, but these entrepreneurs are the ones who will lead us into our next economic expansion….and we will have one!
To ensure this bright future, don’t just get ready to pivot — get ready to hopscotch!